Bank Negara Malaysia (“BNM”) Monetary Policy Committee decision on 7 May 2019
The Monetary Policy Committee (“MPC”) of BNM, during its meeting on 7. May 2019, decided to reduce the Overnight Policy Rate (“OPR”) to 3.00% from 3.25% previously. The ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25% and 2.75% respectively.
BNM in its statement highlighted that downside risks to global growth remain. This stems from unresolved trade tensions and prolonged country-specific weaknesses in the major economies, further dampening global trade and investment activities. Although the tightening in global financial conditions has eased somewhat, heightened policy uncertainties could lead to sharp financial market adjustments, further weighing on the overall outlook.
Meanwhile, BNM confirmed that the latest economic indicators point towards moderate growth in the 1Q 2019 while slowing global demand conditions and subdued growth of key trading partners will continue to weigh on the external sector. Domestically, stable labour market conditions and capacity expansion in key sectors will continue to drive household and capital spending. BNM projected the Malaysian economy to grow within the range of 4.3% - 4.8%. And hinted that there are downside risks to growth from increased uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors.
BNM retained its earlier position that headline inflation in 2019 is expected to be “broadly stable compared to 2018”. It maintained that headline inflation has been lower largely due to policy measures and indicated that the headline inflation will continue to be dependent on global oil prices.
BNM’s intention on adjusting the OPR lower is to preserve the degree of monetary accommodativeness. This is consistent with the monetary policy stance of supporting a steady growth path amid price stability. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.
Outlook and investment strategy from Principal Asset Management
The OPR cut has largely been priced-in by the domestic equity market. We do not expect significant market impact unless BNM continues to ease going forward (which is not our base case). Fundamentally, lower interest rate will compress banks’ margins while boosting the Real Estate Investment Trust (“REIT") sector due to yield compression. Ringgit will also be under pressure which benefits exporters with the reverse for importers.
Our conventional equity portfolios have generally benefited from the OPR cut as we have been underweighting the banking sector while building our REITS position since early 2019, in anticipation of this rate cut. We have remained neutral on MYR sensitive sectors. Going forward, we look to add more banking names especially those with good yield. The exposure to REITs will be maintained as it provides steady dividend income and stabilize the portfolio. We look to add beneficiaries of a weaker Ringgit on weakness.
We expect the domestic bond market to be well supported after the OPR cut despite some profit taking activities. Believe government bond yields have largely priced in the OPR cut and prefer to position our portfolios in corporate bonds for the higher yield pick-up relative to the government bonds.
Will continue to position a longer portfolio duration versus benchmark as bond yields are expected to be stable with limited downside in terms of yields as we believe BNM will keep OPR unchanged for 2019.